Modern Monopoly

This week the IMF and the World Bank held their annual conference in Washington. The concerns for global growth that were expressed at the Conference echoed through the canyons of Wall Street leading to one of the most volatile weeks in recent stock market history. Former Obama economic advisor Larry Summers gave a speech that expressed much of the concern.

At a conference on Thursday, Lawrence H. Summers, the former United States Treasury secretary who now teaches at Harvard, highlighted this concern. “The defining challenge of our time, economically, is secular stagnation,” he said. “It is the risk of inadequate growth, leading to inadequate potential, leading to inadequate growth.”

I have been arguing for the past year that the source of this stagnation is lack of investment. A new breed of ultra efficient corporation is holding record amounts of cash on their balance sheet while having record low amounts of debt.

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Why do Google or Apple have more than $100 billion in cash on their balance sheets? Because they operate in a framework of Monopoly (Google in search) or Duopoly (Apple and Google in mobile operating systems) capitalism that does not conform to the classic notions of market functionality.

John Bellamy Foster and Fred Magdoff, in their book The Great Financial Crisis, describe the work of the economists Paul Baran and Paul Sweezy on monopoly capitalism like this.

The problem, as they explained it, was that the enormous productivity of the monopoly-capitalist economy, coupled with oligopolist pricing, generated a huge and growing surplus, which went beyond the capacity of the economy to absorb it through the normal channels of consumption and investment.

My sense is that we are going to see more of these so called “Natural Monopolies”, where the network effect tends to create a winner take all outcome. Google in Search, Amazon in E Commerce for Books, Facebook in Social Networks and potentially Comcast in Broadband service, all seem to have a kind of insurmountable scale advantage against late entrants. Libertarians like Peter Thiel love both the monopoly profits and the absence of anti-trust regulation. But I think it is fairly naive to assume that new competitors are going to spring up and so we may have to re-envision a kind of anti-trust regulatory policy to ensure that these new monopolies don’t abuse their position.

On Tuesday October 14 at 5 PM PDT, I’m going to be guest hosting Ian Master’s Background Briefing radio show on Public Radio. I’m going to interview three brilliant experts who have wrestled with these issues. Attorney Bob Kohn has written about Amazon’s recent battle with book publisher’s, MIT’s Ethan Zuckerman is thinking about Google and the world of advertising on line and John Bergmayer of Public Knowledge has led the fight against Comcast.

It should be interesting.

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No Bad Culture

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I’ve been having a lively discussion with my colleague Henry Jenkins, occaisioned by A.O.Scott’s recent essay in the Times entitled, The Death of Adulthood in America Culture, and Frederik DeBoer’s trenchant response. Scott is of course trying to exercise the traditional role of the arts critic, depicting the difference between the real deal and the second rate. Here he narrates the descent from the young rebels of the 1950’s (as depicted by the critic Leslie Fiedler) to the Bro rebels of our contemporary age.

The bad boys of rock ‘n’ roll and the pouting screen rebels played by James Dean and Marlon Brando proved Fiedler’s point even as he was making it. So did Holden Caulfield, Dean Moriarty, Augie March and Rabbit Angstrom — a new crop of semi-antiheroes in flight from convention, propriety, authority and what Huck would call the whole “sivilized” world.

From there it is but a quick ride on the Pineapple Express to Apatow. The Updikean and Rothian heroes of the 1960s and 1970s chafed against the demands of marriage, career and bureaucratic conformity and played the games of seduction and abandonment, of adultery and divorce, for high existential stakes, only to return a generation later as the protagonists of bro comedies. We devolve from Lenny Bruce to Adam Sandler, from “Catch-22” to “The Hangover,” from “Goodbye, Columbus” to “The Forty-Year-Old Virgin.”

But of course like any critic of contemporary pop culture, Scott is carefully defensive lest he would be categorized with the “get off my lawn, kids” crowd. Continue reading

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Capitalism Vs. Competition

Peter Thiel is one of our smartest investors. He helped build Pay Pal and was the first real outside investor in Facebook. He’s also an uber libertarian. He has a plan to build islands outside the range of any government to house his enterprises. He’s about to publish a book which says that we should embrace monopoly digital capitalism.

Nevertheless, devaluing competition is a central theme of Thiel’s new book. He asserts that “capitalism and competition are opposites,” because “under perfect competition, all profits get competed away.” He exhorts entrepreneurs to seek out monopolies, concluding, “All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition.”

I wrote, what for me was a fairly scholarly article on this idea of digital monopoly capitalism last spring. But now I realize why Thiel and Sergey Brin and Mark Zuckerberg are libertarians. They like monopolies like Facebook and Google and they don’t want the government regulating them. It may very well be that certain types of digital firms are natural monopolies. The contrast with the movie, TV or Music business, where there is ample competition, couldn’t be more stark.

This tends to be the case in industries where capital costs predominate, creating economies of scale that are large in relation to the size of the market, and hence creating high barriers to entry; examples include public utilities such as water services and electricity. While in other situations a monopoly can lead to restricted output, higher-than-necessary prices, and production that is inefficient (at higher average cost) than would occur with many producers, a firm that is a natural monopoly produces at lower average cost than would be possible with multiple firms.

Certainly one could argue that both search engines and Broadband ISP’s fall under this model. At the start of the American communications revolution we decided that both telegraph and telephone services were natural monopolies, because having hundreds of wireline providers was ridiculously inefficient.

New York City-1890

New York City-1890

What we did do was regulate both Western Union and AT&T. The result was an age of extreme innovation. As I have written before, all you have to do is look at the AT&T Research Lab during it’s most regulated era.

Bell Labs was a subsidiary of the monopoly telephone company, A T & T. Because A T & T didn’t have to spend billions on advertising (A T & T spent almost $2 Billion last year), they could dedicate a huge budget to their R & D Lab. As written in The Idea Factory: Bell Labs and the Great Age of American Innovation  the transistor, the microchip, the solar cell, the microwave, the laser, cellular telephony all were invented along with myriad other things we take for granted.

As a society we are going to have to decide fairly soon whether Comcast, Google, Facebook and Amazon are some sort of natural monopoly that needs to be regulated or whether we are going to pretend that competition and capitalism can exist in harmony in the digital age. Peter Thiel knows that’s a fantasy, but do the regulators in Washington?

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Shiny New Object

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I was asked to speak at a meeting of media, entertainment and technology professionals on Saturday. I gave a presentation that I call Cloud TV that envisions a world of TV on demand delivered over ultra high speed fiber optic IP networks. I noted that there is no technological barrier to this vision and that we work with a public utility in Chattanooga that has deployed a one gigabit symetrical network. I expressed the sentiment that the reason we have so much crappy reality TV is that programmers need to fill up the endless hours on the 500 channels of cable TV. I realized there were probably a good number of cable TV execs in the audience, but what the hell, it was Saturday morning.

Near the end of the presentation I posed one problem that I thought we had to tackle–I call it the discovery problem. In our experience observing the Disney Movies Anywhere App, most of the customers download the latest hit, Frozen and very few take the time to look at the old classics like Dumbo. I noted that in the music business, 80% of the downloads are for 1% of the content. So it turns out The Long Tail is a total myth. I expressed concern that we were experiencing a kind of cultural amnesia by neglecting the incredible wealth of wonderful movies, TV and music created in the last 80 years.

When I finished, the moderator of the event came up on stage to take the Q & A and he asked the first question, “Why should we care about Dumbo, it’s an old movie?” I’ve given this presentation a lot of times before, but I had never been asked that knucklehead question. So I replied, why should we care about Leonardo DaVinci, Picasso or Louis Armstrong’s work? They are all dead. Why should we have museums? I saw a little light go on in his eyes as he said, “good point”. Later a friend who was in the audience wrote me saying that the moderator’s pov demonstrated the “shiny new object” phenomenon in all its superficiality. He’s right. Look, I’m going to pay attention to the I Watch launch on Tuesday, just like you are. But it won’t define my day, my week or my life. Not everything has to be new to be relevant and yet it is getting harder and harder to get folks to watch or listen to the past masters. I don’t have any idea how to deal with this problem, but I do think it is a problem.

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A Post on Medium

I’ve begun using Medium for some much longer, more personal essays. Here is the first one.

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Distraction Inc.

Kareem Abdul Jabbar wrote a very good op-ed in Time this week about Ferguson. This seemed to me to be the key paragraph.

The U.S. Census Report finds that 50 million Americans are poor. Fifty million voters is a powerful block if they ever organized in an effort to pursue their common economic goals. So, it’s crucial that those in the wealthiest One Percent keep the poor fractured by distracting them with emotional issues like immigration, abortion and gun control so they never stop to wonder how they got so screwed over for so long.

If you think about Ferguson as a microcosm of this problem, you have ask yourself “how come in a city that is 80% African American, is the city council 90% white?” The answer is fairly simple. The voter participation rate in the last city election was 12%. So most of the whites voted and most of the African Americans did not.

If the One Percent wanted to construct a “democracy” where they could hold most of the political power, despite their micro-minority numbers, they would need to do more than just distract the poor with issues like immigration. They would need to convince both the poor and the lower middle class that there is nothing to be gained by participating in politics. If you have ever been to a political fundraiser in Washington, where the lobbyists are swarming the candidate and his staff like groupies, you know that for the rich there is a real self interest in participating in politics. Political influence pays direct benefits in the form of tax breaks or decreased regulations. But for most people, there seems to be nothing gained by participating in politics and one could argue that the Republican strategy of total obstruction was partially calculated to enforce this perception amongst the average citizen that nothing gets done in Washington, so why bother.

But there is another part of the distraction business, which is the role of the media. In Aldous Huxley’s Brave New World, the government keeps the populous in a passive state through a combination of immersive mindless entertainment (The Feelies) and daily doses of drugs (Soma) that mimic the effects of both Prozac and Viagra. One could argue that the people are too damned busy watching Real Housewives of Atlanta, while washing down their Oxycontin with light beer, to get up off the couch and vote.

Voter Registration-Ferguson

Voter Registration-Ferguson

Of course when someone tried to address this issue last week in Ferguson, the idiots at Breitbart jumped all over them. We will of course watch many Republican legislatures try to make voting even harder in the next few months.

Finally, it occurred to me in the last week that the Civil Rights movement desperately needs a new generation of leaders. When you see camera hounds like Al Sharpton and Jesse Jackson hogging the spotlight in Ferguson and not a single local young black leader, you have to despair. Martin Luther King was 39 when he was killed, after a decade of struggle. Where is the 29 year old Black leader that can impress on a new generation the “fierce urgency” of getting out and voting in November?

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Against The Monoculture

As most of you know, I worry a lot about the American Monoculture: where 80% of the music downloads got to 1% of the musicians. Where 80% of the people buy from H & M or Forever 21, taking advantage of the exploitation of Bangladesh kids in the factories. Where a huge percentage of the population gets their meals from McDonalds or KFC. SO I have spent the last week in New Orleans, Florence Alabama and Oxford Mississippi observing and consuming a regional culture made by artisans with a passion that is quite remarkable for our cynical times.

i walked around the Bywater neighborhood of New Orleans and photographed 50 row houses and not a single one of them was painted the same way.

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Then I drove up to Florence, Alabama where the clothing designer Billy Reid was holding his sixth annual Shindig; a celebration of southern food, music and fashion.

Billy Reid

Billy Reid

Billy is a prime example of what the Southern Culture scholar John T. Edge calls the new southern Rennaissance. He has planted his flag in Florence and has revived the town. It has a flourishing food scene and of course still pulls upon the music scene from Muscle Shoals which is the next town over. What he and other southern designers like Natalie Chanin are trying to do is bring the aesthetic of “farm to table” that they have adopted from their southern food brethren, to their work in clothing. Could the South with its bountiful cotton harvest become a center for artisanal fabric development in the same way that the Italians have continued to sustain their local artisans? It’s of course not an easy job in an age of globalization when all fabric manufacturing is going to Asia. But as someone said,”you have to start somewhere”.

Throughout the weekend I was surrounded by a sort of southern hipster that seemed distinctive from the tribes of Brooklyn or Echo Park. Their culture is not as dependent on the Internet. Ashley Diamond, a fashion writer from New York is actually starting a regional culture magazine with no Internet site. Much of the energy comes from face to face meetings, meals and jam sessions. It is regional in that a great cook like Ashley Christensen from Raleigh, NC can identify with Andy Ticer and Michael Hudman who cook in Nashville.

There is a tremendous lack of understanding between the South and the North in America. In some ways I found New Orleans to be far more integrated racially than Los Angeles. Those of us from the North have dined on the amazing cultural banquet that the South has given us: Louis Armstrong, Howlin’ Wolf, Elvis Presley, Little Richard, Willie Nelson and Billy Reid featured two young bands Wild Cub and The Apache Relay that are carrying on the tradition. We talked a lot about the word “curation” which I have been using around here recently. I think people want a simpler life. They want a few good pieces of clothing that will last, some good meals that are memorable, and some good music that is original and not just some DJ sample.

They are trying to do that in Louisiana, Alabama and Mississippi. The artists are trying really hard to get beyond the legacy of Selma and Birmingham. They don’t have all the answers, but at least they are making a really good stab at creating an original regional culture.

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The Agent Problem

It occurred to me this morning as I scanned the headlines that three of the big stories in the paper this morning all had the same root cause. The flood of child migrants on our Southern border, the flood of inversion deals as companies seek to lower their tax bill and Rupert Murdoch’s quixotic attempt to takeover Time Warner all start with what I call the “Agent Problem”. An agent is an intermediary who makes his profit from a transaction without regard to the larger consequences. Let’s start with the Inversion issue. The Treasury Secretary says the Obama administration may have to act to stop the flood of deals being proposed by Investment Banks (agents).

The action comes in the face of a recent increase in United States companies reaching deals to reorganize overseas, creating an explosive political issue that Mr. Obama has called a lack of “economic patriotism.” Investment banks have been counseling companies to pursue such transactions because of the potential tax benefits.

The wizards at Goldman Sachs don’t care about eroding the tax base of America, they just want another fee. The same mentality went into the idea some genius proposed to Rupert Murdoch to acquire Time Warner. The deal had nothing to do about innovation or creativity–supposedly the root mission of a media company–it was just financial engineering. size for the sake of Rupert’s ego. Of course there would have been millions in fees to investment bankers, but the businesses would have suffered through the turmoil and ultimately would have destroyed value, like most of the other media mergers that preceded it.

By now you are wondering how does migrant children fit into all of this? In this case the agents are “Coyotes” trolling the slums of Guatemala, Honduras and San Salvador. Armed with misleading marketing materials which led poor parents to believe that if their kids could make it over the border they could qualify for U.S. citizenship, they signed up 50,000 kids in four months to come with them over the border. None of this would have happened without the agents.As Interpol points out, people smuggling is a huge business for organized crime networks.

The flow of migrants across borders is controlled increasingly by criminal networks. Due to more restrictive immigration policies in destination countries and improved technology to monitor border crossings, willing illegal migrants rely increasingly on the help of organized people smugglers.

I don’t know how we deal with the agent problem. They are always moving on to the next deal, and never get blamed for the disasters they leave behind. Any thoughts?

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The Sharing Economy-A Dissent

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I’ve been thinking a lot about the role of the University in creating a humanistic framework for this technological disruption that is affecting all of our lives. Then I came across a column from A.O.Scott this morning.

Universities and colleges, the seedbeds of a cultural ideal consecrated to both excellence and democracy, to citizenship and to knowledge for its own sake, are becoming either hothouses for the new dynastic elite or training centers for the technocratic debt peons of the digital future.

It is that last line that caught me up short: “training centers for the technocratic debt peons of the digital future.” WTF? So I just came back from the Aspen Institute where I participated in a three day round table on digital disruption. Some of the young technocrats were extolling the role of the sharing economy in providing a financial lifeline for the kids who are coming out of college and can’t find a job. Are they the “debt peons of the digital future”? At one point someone said that the average 30 year old might be holding down four or five jobs simultaneously in this brave new world–driving an Uber car while renting their spare room on Air BnB and raising money for their video on Kickstarter while doing odd jobs on Taskrabbit.

And then a friend pointed me to an old blog post called The Locust Economy and it all came into focus.

I was picking the brain of a restauranteur for insight into things like Groupon. He confirmed what we all understand in the abstract: that these deals are terrible for the businesses that offer them; that they draw in nomadic deal hunters from a vast surrounding region who are unlikely to ever return; that most deal-hunters carefully ensure that they spend just the deal amount or slightly more; that a badly designed offer can bankrupt a small business.

He added one little factoid I did not know: offering a Groupon deal is by now so strongly associated with a desperate, dying restaurant that professional food critics tend to write off any restaurant that offers one without even trying it.

Yet, I’ve used (and continue to use) these services and don’t feel entirely terrible about doing so, or truly complicit in the depredations of Groupon. Why? It’s because, like most of the working class, I’ve developed a locust morality.

The writer Venkatesh Rao makes the basic point that the so called sharing economy is designed by the 1% to help the 90% destroy the livelihoods of the 9% who make up the small business middle class. Rao’s piece is fairly complicated but you should definitely read it because he points towards the future of digital peonage that Scott referenced.

In other words, in a locust economy, you cannot just decide to go somewhere and get in your car to drive there. You have to coordinate with other potential users of that shared resource. You have to keep your apartment clean and sharing-ready. You have to do minimum-wage work that you might consider beneath you (though such status concerns don’t bother me, annoying chores do).

In the sharing economy, we may not be eating each other literally, but we’re certainly eating into what Richard Dawkins called the extended phenotype of our neighbors. To the extent that your belongings are a logical expression of your genes and memes sharing them amounts to allowing others to eat them.

So the harsh bottomline of the locust economies, once the Jeffersonian middle class prey base has been bankrupted, is that we locusts turn on each other.

We call it peer production and prosumer economics, but it isn’t Jeffersonian producerism. It is locusts in their cannibalistic phase.

When the harvest is gone, software eating everything translates to prosumers eating each other.

I sent the Locust Economy blog to one of my mentors. This is what he wrote back.

for better or worse – the sharing economy has to lower the GDP and at least currently would speed up the demise of the middleclass and push more onto the long tail of minuscule incomes that in turn accelerates the sharing economy since that is the only way these folks can survive. This all has many unintended consequences and in the long run may not enhance sustainability.

Which brings me back to my original question. If the Universities are “becoming either hothouses for the new dynastic elite or training centers for the technocratic debt peons of the digital future” then we are screwed as a culture. If we are not willing to question some of the suppositions of the technocratic elite before we send our students into the maw of the New Economy, then we have lost our purpose. If the future we are creating for them is a life of five part-time jobs in the sharing economy then we have failed them and we might as well close up shop.

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Fortress Americas

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For a long time I’ve been citing Robert Kaplan’s thesis put forth in his prescient book The Coming Anarchy.As I wrote two years ago,

Asia, Europe,the Middle East and Africa will fulfill Robert Kaplan’s prediction of The Coming Anarchy: Shattering the Dreams of the Post Cold War in which tribal, ethnic and religious conflicts combine with resource depletion to destabilize much of the world order. The key to our survival will be to pull back from our role as the world’s unpaid policeman, rebuild our own production capacity and manage our natural resources with a view towards sustainability. I do not see either political party confronting this possibility, but I do think the Neo-con vision of Romney and Ryan would make a bad situation worse.

Now of course all of this seems to be coming true as the papers are filled with the anarchy in Syria, Iraq, Ukraine, Libya, Nigeria, Afghanistan, Pakistan and Gaza. Richard Haas, President of the Council on Foreign Relations argues that the Mid East is entering a new Thirty Years War.

Policymakers must recognize their limits. For now and for the foreseeable future – until a new local order emerges or exhaustion sets in – the Middle East will be less a problem to be solved than a condition to be managed.

The implication, of course is that it is our policy to manage. I disagree. First off, the implications of the Thirty Years War will be felt in Europe, Africa and Asia where the migration pressures of people fleeing drought and conflict will be strongest. By contrast the Western Hemisphere is in a period of extraordinary growth and peace. Gone are many of the military dictators in South America. Despite some of the immigration turmoil coming from Honduras and El Salvador, even George Will admits we can handle the influx of immigrants.

“We ought to say to these children, ‘Welcome to America, you’re going to go to school and get a job and become Americans,’” Will implored. “We have 3,141 counties in this country. That would be 20 per county. The idea that we can’t assimilate these eight-year-old criminals with their teddy bears is preposterous.”

Three years ago I wrote about this, without much traction. Continue reading

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